Optimizing channel profits with threshold incentives and alternative pricing schemes

Abstract

We analyze manufacturers' trade promotions that are offered in the form of threshold incentives. In such programs, the incentive is given if the retailer's order/sales quantity exceeds a pre-specified threshold level, and can be offered as a lump-sum payment or on a per-unit basis. The manufacturer determines the incentive terms and her wholesale price; in return, the retailer reacts with his profit-maximizing decisions, which ultimately impact the market demand and total channel profits. Modeling two alternative pricing schemes by the retailer, we investigate the performance of threshold incentives from the channel perspective. We find that the threshold incentives optimize channel profits in equilibrium when the retailer exercises first-degree price discrimination, but they lead to suboptimal channel efficiency when the retailer implements uniform pricing. We extend our models to address demand uncertainty and an alternative form of incentive scheme, and we generate further insights from numerical examples.